FASB Summary of February 23, 2000 Board Meeting
Discussion

Derivatives Implementation Group

Derivatives and hedging-possible amendment of
Statement 133. The Board discussed whether to permit LIBOR swap
rates to be the hedged risk in a hedge of interest rate risk. The
Board also discussed transition issues related to hedging interest
rate risk and issues related to its decision at the February 16,
2000 Board meeting to further expand the normal purchases and
normal sales exception to contracts that meet the market mechanism
provisions contained in paragraphs 9(b) and 57(c)(2) of FASB
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities.

The Board decided to make a practical exception to
allow entities to designate LIBOR swap rates as the hedged risk in
a hedge of interest rate risk. That decision follows the January
18, 2000 Board decision to incorporate credit sector spread in
credit risk rather than in market interest rate risk and to
interpret market interest rates as the risk-free rate of interest.
In the United States, currently, the definition of interest rate
risk would include only the interest rates on direct Treasury
obligations of the U.S. government and the LIBOR swap rate.

The Board also decided that entities that have
adopted Statement 133 prior to the effective date of the proposed
amendment should dedesignate any hedging relationship based on the
definition of market interest rates as interpreted in Statement 133
Implementation Issue No. E1, "Hedging the Risk-Free Rate." An
entity can then simultaneously designate a hedging relationship
under the new definition of interest rates (which include the
risk-free rate or LIBOR swap rates in the United States). The
change would be made only on a prospective basis.

The Board decided that contracts that require cash
settlement on a daily or other periodic basis have the
characteristic described as net settlement in the definition of a
derivative in Statement 133 and, therefore, are derivatives that
would not qualify for the normal purchases and normal sales
exception in paragraph 10(b) of Statement 133.